Morne Patterson - The Trump Effect: What Really Happened to US Markets 2016-2020

 

Understanding the impact of Donald Trump on US markets during his previous term provides valuable insights for the term ahead. In 2016, US markets witnessed the most incredible election response when the S&P 500 surged 1.1% on 9 November 2016, following Donald Trump's initial victory. We saw the market rally to unprecedented heights, driven by expectations of substantial policy changes and economic reforms.

During Trump’s previous presidential term, his impact on US stock markets was immediate and significant. The S&P 500 demonstrated a consistent upward trajectory, with the index gaining approximately 19.4% in 2017, the first calendar year of his presidency. Small-cap stocks showed particular strength, rising approximately 15.5% in the month following the election, as measured by the Russell 2000 index. Additionally, the 10-year Treasury yields jumped from 1.86% to 2.45% in the month following the election, reflecting heightened expectations of fiscal stimulus.

We have analysed the complex market dynamics during this period to provide a comprehensive understanding of how Trump's presidency reshaped the financial landscape. From tax reforms to trade policies, this analysis breaks down the key factors that influenced market behavior during this transformative period.

 

The Pre-Trump Market Landscape

Looking back at the US markets before Trump's victory in 2016, we find ourselves examining a period of steady recovery. By late 2016, the economy had largely recovered from the Great Recession, with the S&P 500 experiencing 74 consecutive months of job growth.

 

State of US Markets Before the 2016 Election

The pre-election market landscape showed remarkable stability. The US economy registered a GDP growth of 2.9% in the third quarter of 2016, whilst the Dow Jones Industrial Average maintained a consistent upward trend. Furthermore, the unemployment rate had dropped significantly from its recession peak of 10% to 4.9% by October 2016.

 

Key Economic Indicators and Market Sentiment

Key economic metrics before the election painted a positive picture:

• Median household income increased by $5,000 during the final two years of the Obama administration.
• The Dow Jones Industrial Average rose by approximately 148% over Obama's eight-year tenure.
• Monthly job growth averaged 195,000 jobs over the last 35 months before Trump.

 

Wall Street's Initial Predictions

Nevertheless, Wall Street analysts remained cautious about the election's potential impact. Major banks projected different scenarios – JPMorgan predicted a 2-3% gain in the S&P 500 if Hillary Clinton won, whilst Barclays forecasted a 10-13% decline should Trump emerge victorious. Consequently, many clients reduced their portfolio risks amid the uncertainty.

Before the election, betting markets gave Clinton a 71% chance of victory, and mainstream economists, including former Bush administration adviser Greg Mankiw, acknowledged that the economy was performing well. The market's stability, however, would soon face an unexpected test.

 

 

First 100 Days Market Shock

Initially, we witnessed a dramatic overnight market response to Trump's victory. US stock futures plummeted by more than 4%, but the markets demonstrated remarkable resilience. The Dow Jones Industrial Average opened slightly higher and ultimately closed up 1.4% at 18,589 points.

 

Initial Market Reaction to Trump's Victory

The market's response proved more measured than many expected. Notably, all three major indexes posted gains by the day's end – the S&P 500 and Nasdaq both rose 1.1%. Trading volume reached its highest level since Britain's Brexit vote in June.

 

Sectors That Saw Immediate Gains

Several sectors benefited immediately from Trump's victory:

• Healthcare stocks surged, with Pfizer climbing 7%.
• Construction equipment manufacturer Caterpillar saw a 5.3% increase.
• Private prison operators experienced substantial gains, with Corrections Corp of America rising 43%.
• Banking stocks performed well due to anticipated deregulation.

 

Key Policy Shifts That Moved Markets

Tax Reforms and Corporate Earnings

The Tax Cuts and Jobs Act of 2017 marked a historic shift in US corporate taxation. We saw the corporate tax rate decrease from 35% to 21%, which transformed the business landscape. This reform delivered several important outcomes:

• Corporate effective tax rates fell from 28% to 19%.
• Business investment in equipment increased significantly, rising 5.1% annually from 2017 to 2019.
• The act provided a 20% deduction for pass-through income, benefiting many small businesses.

 

Trade War Impact on US Stocks

The trade war with China undoubtedly created significant market turbulence. Analysis shows that US-China tariff announcements reduced aggregate equity prices by 5.4%. Accordingly, this resulted in:

• A $1.7 trillion loss in US firm value.
• A 6% decline in US equity prices across major tariff events.
• A 0.3% reduction in GDP growth for 2018 and 2019.

 

Federal Reserve's Response

The Federal Reserve maintained a careful approach throughout these policy shifts. We noticed that two-year US interest rates rose by approximately 60 basis points, whilst the S&P 500 experienced an initial decline of 0.9%. The Fed adopted a "wait-and-see" approach, carefully balancing growth support against inflationary pressures.

 

Market Performance Through Major Events

COVID-19 Market Crash and Recovery

In early 2020, we witnessed an unprecedented market crash. The S&P 500 plunged 34% in just 33 days, marking the fastest bear market in history. At this point, the Dow lost 37% of its value between 12 February and 23 March.

Likewise, the recovery proved equally remarkable. The S&P 500 reached record highs by 18 August 2020, whilst the Dow crossed 30,000 for the first time in November 2020. Over Trump's term, the Dow jumped 56% overall, despite the pandemic-induced volatility.

 

Conclusion

Looking back at Trump's presidency, we've seen how his policies created both opportunities and challenges for US markets. The initial market shock after his election quickly turned into a sustained rally, driven by corporate tax cuts and business-friendly policies. Though the trade war with China caused significant market turbulence and cost US companies billions in value, the markets showed remarkable strength.

The most dramatic test came with the COVID-19 crash in 2020, yet the recovery that followed proved equally impressive. The Dow's 56% overall gain during Trump's term, despite unprecedented challenges, stands as a testament to market resilience during this period.